The Finance and Expenditure Select Committee considering the Overseas Investment Amendment Bill (the Bill), which contains the proposed “foreign buyers ban” on ownership of residential land in New Zealand, has recommended that the Bill be passed into law – but with significant amendments.

Accepting criticism that the new law would, contrary to its purpose, adversely affect the housing supply because of its restrictions on foreign investment in new housing developments, some of the major changes will see the relaxation of the restrictions on foreign investors looking to buy apartments.

The Select Committee has also recommended giving effect to the recent Supplementary Order Paper No.19 to bring forestry rights and other profits a prendre through the passing of the Bill.

Summary of the changes

The Overseas Investment Amendment Bill was introduced at the end of last year to restrict overseas investors from buying New Zealand homes – and to free up more homes for New Zealanders.

The Bill initially classed all residential land as “sensitive” (residential land being, generally, all properties classified as either ‘residential’ or ‘lifestyle’ for rating valuation purposes under the relevant district valuation roll). This meant anyone who was not a New Zealand citizen or permanent resident would have to obtain consent to buy the land. Foreign buyers could get consent to buy land if they were adding to the housing stock by building a new house or apartment – but they would have to sell it on once it was built. See our previous article for more detail on the original Bill.

On its introduction, the Bill was roundly criticised and a reported 90% of the approximately 200 submissions received by the Finance and Expenditure Committee were critical of various aspects. Following the Committee’s report, the Government has announced that it will accept many of the changes suggested.

One of the key changes is that foreign buyers will now be able to buy and keep an apartment bought “off the plan” without consent, as long as it is part of a large multi-storey development of 20 or more apartments. They cannot live in the apartments themselves, but can rent them out as part of an arms’ length leasing arrangement, a shared equity development or a rent-to-buy model.

The Committee also recommended restrictions on how many units in a new development could be sold to overseas buyers, with indications that this threshold will likely be set at 60 percent, although that figure could be adjusted either up or down by regulation.

Foreign buyers will still not be allowed to purchase existing standalone homes or hold on to new standalone homes on land they bought for development.

Other main changes recommended by the Select Committee are:

allowing all resident visa holders, not just those with permanent resident visas, to buy land without Overseas Investment Office consent;

putting the burden of proof on purchasers to make sure they meet the residency criteria;

allowing foreigners to invest in major hotel developments as long as they lease the rooms they buy back to the hotel;

allowing utility companies to build cellphone towers and similar on residential land;

establishing a streamlined approval path for businesses purchasing residential land for non-residential purposes, or for residential purposes to support a business.

An important aspect of the Bill that has not been changed, despite much criticism, is that retirement villages will be caught by the ambit of the legislation.

The Government has also announced Singapore will join Australia as an exempted nation, with all of its citizens enjoying the same rights as New Zealanders to buy property, in order to not disrupt an existing free trade agreement. Acting Prime Minister Winston Peters has since made references to a side-letter which requires the parties to meet and re-discuss if Singapore nationals start buying up houses in significant numbers.

Forestry

The Select Committee has recommended that the changes proposed under Supplementary Order Paper No.19 relating to forestry rights for areas in excess of 1,000 hectares be included into the Bill (with some amendments). Further, all other non-forestry profits a prendre relating to areas in excess of 5ha will now be caught, which is a significant change to the status quo – previously profits a prendre were treated as exempt interests in land.

There are modified/streamlined consent pathways for forestry acquisitions (both freehold or leasehold land and forestry rights) which are intended to take into account the specific circumstances of the forest investment sector by amending the ‘benefits to New Zealand’ test. The most significant of these new pathways for consent is to provide a “special benefits test” which removes the requirement for a counterfactual test. Instead, to qualify for this test investors will be required to meet certain requirements to be set out in regulations. The applicable regulations have not yet been released.

Finally, for those forestry transactions which meet the proposed ‘special benefits test’, the Bill introduces the concept of a standing consent which may be granted to certain forestry investors.

Our view

We had considerable concerns with the original Bill and it is pleasing to see that many of these concerns have been acknowledged and mitigated to some extent. It is encouraging to see some implicit recognition that improving the rental supply is a key way to address housing affordability and it will be interesting to see if new models like shared equity and rent-to-buy become more prevalent in the market.

However the Bill adds considerable complexity to an already cumbersome piece of legislation, which is well known for the “unintended consequences” of its scope and operation. Accordingly we expect that once enacted, unintended consequences will appear as parties apply the new regime to their transaction scenarios.